Instruments of Real Estate Finance

Question 1

Describe and define the two classifications of encumbrances.

Answer 1

An encumbrance that affects the physical condition of the property, such as restrictions, encroachments and easements.
An encumbrance that affects the title, such as judgments, mortgages, mechanics’ liens and other liens.

Question 2

List and describe three provisions that are common to most notes. (See other correct answers on screen 5.)

Answer 2

Amount borrowed – This is the face amount of the note that is advanced when the note is executed.
Interest rate – The rate can be either fixed or adjustable. If it’s adjustable, the note should specify how the rate will change.
Amount of payments – The amount of the payments will be determined by the face amount of the loan, the length of the loan and the interest rate.

Question 3

What is a mortgage?

Answer 3

A mortgage is a financing instrument that pledges the real property described in the mortgage document as collateral for the debt described in the note.

Question 4

How does a note differ from a mortgage?

Answer 4

A note is a complete contract. After it is legally signed by the borrower, it is a legally-enforceable and fully-negotiable financial instrument. A mortgage however, always needs a note to be legally valid.

Question 5

What is a deed of trust?

Answer 5

A deed of trust is a legal document which transfers title to a property to a third-party trustee as security for an obligation owed by the trustor (the borrower) to the beneficiary (the lender).

Question 6

List two reasons that lenders prefer to use the deed of trust when making loans. (See other correct answers on screen 14.)

Answer 6

A trustee may be given the power to sell property after default without going through the time-consuming judicial foreclosure process.
A deed of trust can be used to secure more than one note.

Question 7

List two differences between a mortgage and a deed of trust?

Answer 7

A mortgage is a lien on the property being given as collateral, with the legal title remaining in the name of the borrower. In a deed of trust, the borrower conveys the property to the trustee, who holds the title to the collateral on behalf of the lender until the loan terms have been satisfied.
A mortgage may be discharged by a simple acknowledgement that the loan terms have been satisfied. A deed of trust is discharged using a re-conveyance of title form.

Question 8

What is a land contract?

Answer 8

A land contract is a complete financing contract in and of itself that is executed between a seller and a buyer, in which the seller pledges to convey the title to the property at the time when the buyer completes whatever obligations the contract stipulates. Under the terms of the land contract, the buyer gets possession of the property and equitable title, while the seller holds legal title to the property and continues to be primarily liable for payment of any existing mortgage.

Question 9

What is Texas’ position regarding late payments on a loan?

Answer 9

Texas has no restrictions on late fees. The customary fee is the Fannie Mae standard of 5% after 15 days.

Question 10

According to Texas law, what is true about prepayment penalties?

Answer 10

Texas law prohibits prepayment penalties on residential mortgage loans secured by the homestead of the borrower if the interest rate on the loan is greater than 12% unless the charge or penalty is required by an agency created by federal law.

Question 11

What is a lock-in clause?

Answer 11

A very drastic form of a prepayment clause which actually prohibits the borrower from paying the mortgage loan in full before a specific date.

Question 12

What is the main advantage and what is the main disadvantage to a borrower to purchase a property “subject to” the mortgage?

Answer 12

Advantage: He cannot be held personally liable for the amount of the debt he assumed. The original owners are still personally and legally responsible for the loan and they may be held liable for any deficiency judgment that could be the result of a foreclosure sale.
Disadvantage: They risk losing all the equity they have in the property.

Question 13

An encumbrance is defined as

Answer 13

“a right or interest in a property held by one who is not the legal owner of the property.”

Question 14

There are two general classifications of encumbrances:

Answer 14

An encumbrance that affects the physical condition of the property, such as restrictions, encroachments and easements.
An encumbrance that affects the title, such as judgments, mortgages, mechanics’ liens and other liens.

Question 15

There are three basic legal documents that are used to finance real estate in Texas:

Answer 15

Note and mortgage
Note and deed of trust
Land contract

Question 16

Whenever a potential homebuyer borrows money for the purpose of buying a home, he or she will be required to sign a document that describes the amount of money borrowed, the terms under which it will be repaid, and any conditions that relate to either the borrowing of the money, or the consequences in event of default.

Answer 16

This document is a promissory note (usually referred to as a “note”) and establishes legal evidence of the debt incurred.

Question 17

The two most common types of promissory notes are

Answer 17

Straight note – This is an interest-only note, whereby the borrower agrees to pay the interest periodically and to pay the entire principal when the note comes due.
Installment note – This note requires the periodic payment of both interest and principal and is the most common note.
A note is itself a complete contract.

Question 18

A mortgage is a financing instrument that

Answer 18

pledges the real property described in the mortgage document as collateral for the debt described in the note. While a note is a fully enforceable legal document, a mortgage always needs a note to be legally valid. In the event of default by the purchaser, the lender has the right to bring legal action through the courts to force a sale of the property

Question 19

Judicial Foreclosure

Answer 19

must be ordered by the court. Proceeds from the foreclosure sale are used to repay the remaining debt on the mortgage loan.

Question 20

A mortgage involves a transfer of an interest in real estate from the owner to the lender. The Statute of Frauds requires

Answer 20

that the mortgage be in writing; however, although a number of formal, standardized documents exist, there is no specific form that is required for a mortgage to be valid.

Question 21

A mortgage can be hand written as long as it addresses

Answer 21

Wording that conveys the intent of the parties to create a security interest in a property for the benefit of the mortgage.
Any other items that the particular state’s law requires.

Question 22

Once the mortgagor has paid off the mortgage in full

Answer 22

the lender will execute and record a mortgage release document indicating that the loan terms have been met.

Question 23

A mortgage assumption is

Answer 23

the act of acquiring title to a property that already has an existing mortgage and agreeing to be personally liable for the terms and conditions of the mortgage, including the payments.

Question 24

A deed of trust is a legal document which

Answer 24

transfers title to a property to a third-party trustee as security for an obligation owed by the trustor (the borrower) to the beneficiary (the lender). A deed of trust is also called a trust deed.

Question 25

A deed of trust differs from a mortgage in the way

Answer 25

the lender achieves the right to secure repayment of the loan.

Question 26

At settlement, when the property is transferred to the new owner who has obtained a mortgage loan

Answer 26

the borrower signs the note and then signs a deed of trust.

Question 27

The deed of trust conveys

Answer 27

title rights in the property over to an assigned trustee. When the borrower repays the note secured by the deed of trust, the trustee will re-convey title back to the borrower using a deed of re-conveyance, also called a release deed.

Question 28

If the borrower should go into default on the loan

Answer 28

the lender contacts the trustee who is then empowered to exercise the “power of sale” granted in the deed of trust. The property is sold and the proceeds given over to the lender without any necessity of going through the court system.

Question 29

Lenders prefer this non-judicial type of foreclosure

Answer 29

because it can usually be accomplished in a much shorter period of time than the judicial foreclosure.

Question 30

Another common financing instrument used over the years is known as

Answer 30

a land contract

Question 31

Land contract

Answer 31

A land contract has several other names, including real estate contract, installment sales contract, agreement for deed, agreement to convey, and contract for deed.

Question 32

A land contract is not tied to a note

Answer 32

It is a complete financing contract in and of itself that is executed between a seller and a buyer. Under a land contract, a seller pledges to convey the title to the property at the time when the buyer completes whatever obligations the contract stipulates

Question 33

Under the terms of the land contract

Answer 33

the buyer gets possession of the property and equitable title, while the seller holds legal title to the property and continues to be primarily liable for payment of any existing mortgage.

Question 34

In an appreciating market, the land contract enables buyers to

Answer 34

purchase property on reasonable financial terms and benefit from the property’s appreciation

Question 35

Late Payment Penalty

Answer 35

clause requires the borrower to pay a penalty or late charge for any payments that are considered to be late.

Question 36

Prepayment Penalty

Answer 36

clause allows lenders to control prepayments by including a provision that allows the lender to assess a penalty to the borrower for paying early.

Question 37

Prepayment Privilege

Answer 37

If there is not a prepayment penalty clause, a Prepayment Privilege clause allows the borrower to repay the balance of the loan at any time without being assessed a penalty.

Question 38

Lock in Clause

Answer 38

is a very drastic form of a prepayment clause as it actually prohibits the borrower from paying the mortgage loan in full before a specific date.

Question 39

A Due on Sale

Answer 39

clause is a form of acceleration clause that requires the borrower to pay off the entire mortgage debt when the property is sold.

Question 40

Subordination Clause

Answer 40

an agreement to reduce the priority of an existing loan to a new loan that will be recorded in the future.

Question 41

Release Clause

Answer 41

often used when two or more properties are pledged as collateral for a single loan, as developers often do. As the developer sells off each lot, a portion of the money from the sale is used to pay part of the mortgage. In return, the lender executes and records a release of the lot that was sold.

Question 42

Exculpatory Clause

Answer 42

is inserted in a financing document when the lender agrees to waive the right to a deficiency judgment.

Question 43

In some circumstances, a buyer may purchase a property “subject to” the existing mortgage

Answer 43

In this situation, the buyer takes possession of the property, while the seller retains legal title until the buyer pays off the loan. The buyer is not liable to the lender for the payment of the note; however, if the seller defaults on the note, the buyer can lose all his or her equity in the property in a foreclosure sale.